NovFrom: Kevin [pontiyak@telusplanet.net]
Sent: Sunday, November 02, 2003 3:05 PM
To: rule-comments@sec.gov
Subject: (s7-23-03) SEC comment letter 2003.doc
Nov. 1/2003
To: Securities and Exchange Commission
Office of Trading practices, Division of Market regulation
Re: Proposed SHO rules
Release No. 34-48709, File no. S7-23-03
From: Kevin Cundy
Airdrie, Alberta, Canada.
Re: Comments to proposed SHO rules
To the members of the Office of Trading Practices and the Division of
Market Regulation.
Please allow me to submit my personal comments as they pertain to the proposed
SHO, or short selling rules as released by your members.
I will be confining my immediate comments to the specific areas of naked short
selling, as I feel that
It is this area, that most affects, and concerns me.
Let me start first start off by commending your group in finally addressing this
securities market problem, and to thank you for the opportunity to comment on same.
I shall start with the commission’s proposal to implement a uniform “locate” rule,
applicable to all securities. First I find it quite disturbing than no such rule
currently exists within the SEC, considering the issue of short selling was
addressed as far back as 1934.Secondly, and if I’m not mistaken a similar rule
# 3370,NASD (affirmative determination), is already in place. I think that the
“locate “ rule is a great addition to help combat the problem of naked short
selling, however, neither The SEC’s new rule, nor the existing rule at the NASD
is of any use if neither rule is enforced, rigorously!
Is it not the Commission that stated in it’s own words that SRO’s have failed to
address the problems of naked short selling, and failed to delivers?
Next is the proposal to require broker-dealers to “locate” and “annotate”
certificates, in writing, before effecting any short sale. This rule is all well
and good and should be implemented, but without an officer of the SEC standing over
the shoulder of every broker-dealer’s trader, this rule will be ignored, just like
all the other fail to delivers, and fail to receives. The commission must remember
two things, one, that it is the same broker-dealers, and market makers that allow
the problem of naked short selling to flow through their respective offices, and
two, as members of an SRO, these same groups have already failed in their mandate
to police themselves. You must put in place an environment where by all members are
forced to abide by both your rules and those of their own, under threat of stiff
sanctions.
You current “locate” proposal puts the onus only on the seller, and/or the sellers
broker-dealer, and it is in this area that there is no enticement for the SRO’s to
police themselves. The annotate rule is a must for the seller’s broker, but I think
that the rule to “locate” certificates should also be fine tuned so that some
responsibility is taken by the buying broker-dealer to receive “good delivery”
from the selling broker-dealer, and that the onus does not fall only on the seller.
The two-day settlement rule also lacks punch in that a seller could naked short sell
aggressively and cause a panic sell off by other holders of that security. And even
though that seller was locked into a 90 day no sell period, they would still be able
to buy back their short position, lock in profits, all to the detriment of the
company and its shareholders. By adding one more step in that rule that says that
the selling broker-dealer is also locked out for 90 days from shorting that security
you remove most of the monetary incentive for a broker-dealer or a market maker to
partake in this sort of manipulative endeavor, and especially for them to allow this
practice to flow through
their offices.
Your proposal to include additional safeguards in areas where there is evidence of
significant settlement failures is one of the best proposals your are considering,
as long as you also make it retroactive to include all current settlement failures
that are piled up in the bottom drawers of broker-dealers all across this securities
market.
This rule among all of the other IMHO reinforces the basic rule of supply and demand.
Which If I’m not mistaken is the fundamental and underlying principal of the
securities market.
Also by including this very important provision, it will send a very strong message
to those who would seek to circumvent the system, that their illegal activities will
no longer be tolerated. It would also be a very efficient way to return stolen monies
to those investors who have seen their portfolios decimated by the practice of naked
short selling.
Clearly, current penalties and sanctions have no little or no effect on broker-
dealers who not only continue to allow this activity to go on but also profit
from it , just from the commissions alone.
As for whether or not all proposals should extend to the Over The Counter (OTC)
and pink sheet securities, I would ask the commission this one basic question…
Is the color of the money being wrongfully taken from investors and companies of
lower cap securities any less green than that of higher cap securities.? Are we not
entitled to equal protection under the law?
You wondered whether the bid tick test should also extend down to the OTC market?
Of course it should, for the very reason that naked short sellers currently have the
ability To flood the market with phony unauthorized shares, at ongoing prices below
the last trade.
Improper tagging of short sales as long sales, and trade settlement of long sales
that started out as a naked short sale. These are two areas that need additional
scrutiny, in that they currently provide additional backdoors for unscrupulous
short sellers to hide their activities from regulators. One , by tagging a short
sale as a long sale or improperly posting a sale as a buy, as opposed to a sell,
the broker-dealer or market maker, is effectively “painting the tape”. There is no
other reason for this, than to hide something from discovery. Secondly, naked
shorted stock that is resold becomes, effectively a long sale. Now we end up with
the situation where by countless phony shares have been introduced into the market,
illegally, and continue to bounce around unsettled, and suppressing the value of
the company. This second point is an area where another SRO, the DTCC has utterly
failed in its mandate, and I shall address this in a later comment.
Next I would like to try and answer some of the direct questions you are asking
of us.
Q. What harms result from naked short selling? Conversely, what benefits accrue
from naked short selling?
A. Small start up companies and their respective investors, never have a fighting
chance to grow, and are in fact beaten down and raped financially, Before even
having the chance to prove themselves. This relates directly to the foundation
and vitality of the economy which is born on the backs of small companies. I see
no benefits what so ever in the practice of naked short selling.
Q. Are there negative tax consequences associated with naked short selling, in
terms of dividends paid or otherwise?
A. The negative tax consequences to naked shorting, comes from the undeniable
fact that a significant portion of it occurs either through or from Canada, and
offshore enclaves, where the reach of the IRS cannot follow. I would speculated
that the current deficits of both Canada and the United States, might be somewhat
less if this back door was closed.
Q. What is the appropriate manner by which short sellers can comply with the
requirement to have "reasonable grounds" to believe that securities sold short
could be borrowed? Should short sellers be permitted to rely on blanket assurances
that stock is available for borrowing, i.e., "hard to borrow" or "easy to borrow"
lists? Is the equity lending market transparent enough to allow an efficient means
of creating these lists?
A. I would think that through new transparency rules requiring broker-dealers to
post a monthly list of their short positions, broken down by each security, and
enforcement and cooperation by the DTCC, a suitable method could be constructed
for short sellers to comply with the proposed rule changes.
Q. Should short sales effected by a market maker in connection with bona fide
market making be excepted from the proposed "locate" requirements? Should the
exception be tied to certain qualifications or conditions? If so, what should
these qualifications or conditions be?
A. Of course market makers have an understandable need to effect short sales
in order to make a market, and it would be detrimental to the flow of the markets
to hamstring the market-makers with such a rule. But the market-makers must be
made to comply with all current and proposed rules as they pertain to “naked short
selling”, as it is through their hands that this problem flows, and they are at
the very least complicit in that they allow this to continue as they stick their
hands out for their commissions, while this persists.
Q. Should the proposed additional delivery requirements be limited to securities
in which there are significant failures to deliver? If so, is the proposed threshold
an accurate indication of securities with excessive fails to deliver? Should it be
higher or lower? Should additional criteria be used?
A. As for regular and legal short selling I believe the current rules with some
minor changes to reflect the current trading times are adequate, and the proposed
thresholds seem reasonable, in that it helps to stem “irrational exuberance” , and
wildly over inflated prices . I think that the rule however, should extend to all
securities , so that similar problems are not transferred to higher cap stocks,
which by the way is an arena that most smaller companies aspire to be in. The
threshold would appear to be high enough to trigger further enforcement, as far
as naked short selling may be concerned.
Q. Are the proposed consequences for failing to deliver securities appropriate and
effective measures to address the abuses in naked short selling? If not, why not?
What other measures would be effective? Should broker-dealers buying on behalf of
customers be obligated to effect a buy-in for aged fails?
A. Clearly the investing public will never be happy with the levels of fines, Or
the current level’s of consequences that are levied at the broker-dealers that fail
in their responsibility to serve and protect their customers. But the proposed rules
are an excellent first step in curtailing the abuses that are prevalent in our
markets. What needs to be done is bring in consequences that hit the guilty parties
where it really hurts, and that is in the pocket book. And by that I don’t mean
miniscule fines and sanctions. I’m talking about serious and severe measure’s that
force the broker-dealers to cease and desist the ongoing activity, and ways in which
will cause the market itself to reverse the flow of ill gotten gains, back to the
victims, in such a way that it becomes a solid deterrent to Future violations.
Broker-dealers buying on behalf of customers should be forced, under threat of
serious consequences, to effect buy-ins on fail to delivers Immediately after finding
out that “ good delivery” will not be forth coming. Otherwise we are back to paying
our brokers for something that will never be delivered, does not exists, and will
never be rectified. We need to be sure that we are receiving something of value,
and not just an easily manipulated electronic notation in our accounts. Thin air
is already sold at the gas station, thank you very much!
Q. Is the restriction preventing a broker-dealer, for a period of 90 calendar days,
from executing short sales in the particular security for his own account or the
account of the person for whose account the failure to deliver occurred without
having pre-borrowed the securities an appropriate and effective measure to address
the abuses in naked short selling? Should this restriction apply to all short sales
by the broker-dealer in this particular security? Should the restriction also apply
to all further short sales by the person for whose account the failure to deliver
occurred, effected by any broker-dealer?
A. Unfortunately this is an area were one bad apple may have to spoil the whole bunch.
Offshore shorters, and/or naked short selling cartels rarely operate under the rules
and may have multiple accounts at the same broker-dealer, under different names.
Unfortunately this rule may have to extend to all short sales in this security by
both the broker and his selling customer, in order to deter future naked short
selling abuses. It would of course be to the detriment of other bona-fide short
sellers at that broker, and in that security.
Q. Should short sales effected by a market maker in connection with bona-fide
market making be exempted from the proposed delivery requirements targeted at
securities in which there are significant failures to deliver? If so, what reasons
support such an exemption, and how should bona-fide market making be identified?
A. Further short sales in a security that is already clouded by significant fails
to delivers, would only make the issue worse. Perhaps a rule could be proposed that
would allow for the closing out, or clearing up of existing fails before further
short sales would be allowed.
Q. Under what circumstances might a market maker need to maintain a fail to deliver
on a short sale longer than two days past settlement date in the course of bona
fide market making? Is two days the appropriate time period to use?
A. Under T+3, that we must all adhere to, I believe that the two day rule is
appropriate. Why should we as the investing public, and the ones that sustain this
market in the first place be forced to have our funds in our accounts within three
days, or less in some cases, and yet our broker-dealers are allowed to stall on
delivery of goods. Certainly in cases of death, accident, or emergency, Broker-
dealers need certain latitude in delivery, but current loopholes are being stretched
far beyond their purpose already.
Q. Are there any circumstances in which a party not engaging in bona-fide market
making might need to maintain a fail to deliver on a short sale longer than two
days past settlement? If so, can such positions be identified? Should they be
accepted from the proposed borrow and delivery requirements, and if so, why, and
for how long?
A. A party not engaged in bona-fide market making has no reason IMHO to maintain
a fail to deliver. To fail to deliver in this case is clearly because the party
never obtain certificates in the first place, was never entitled to them, and
clearly is hiding something, in order to deceive and defraud. Positions can be
clearly identified by transparency from the broker-dealer, and records from the
DTCC, not to mention the state of incorporation and the company itself.
I hope that my answers to your questions help you to refine your proposals, but
before I end I have a few proposals and general comments that you might find useful.
Proposals.
Some very basic and very effective proposals offered by others, which I’m sure
you will read more than once, over the next 60 days.
-- The SEC immediately enforce all existing laws pertaining to
shorting in the 1933 and 1934 Securities
-- Anyone outside the U.S. requesting access to U.S. Securities
Markets must agree to comply in full with U.S. securities and
market laws, rules and regulations.
-- Rules prohibiting Sale of Unregistered Securities must be
rigorously enforced. Naked shorting is such a violation.
-- Any short sale must be done only after an "Affirmative
Determination" is made regarding the ability of the trader to
borrow the shares sold short for delivery within 3 days.
-- All trades must settle and clear within three trading days
from trade date.
-- Use of whip calls, kiting, electronic counterfeiting and other
such manipulations be subject to racketeering laws.
-- Shares may only be shorted on a zero or zero plus tick, except
for registered market makers and recognized arbitrage traders
for their own accounts only and not for client accounts.
-- DTCC must maintain the "identity type" of accounts for shares
transferred to its custody. Shares held in Cash, Excess
Margin, ERISA and similar accounts not be lent under any
circumstance. Already an existing rule, it is being ignored.
-- Real penalties be imposed including interest charges and
sanctions for any trades left unsettled after 3 days. A 10-day
fail be immediately treated as a broken trade.
-- Broker-dealers, clearing firms and clients shown to be engaged
in attempts to circumvent the above guidelines be formally
sanctioned once, and lose their licenses for a second offense.
General comments.
Next I would like to do my part to help clear up some biases and misconceptions
that I keep seeing, one is that that the OTC and pinks sheets are thinly traded
securities. Some of the securities I follow trade well over a billion shares a
day. Mostly that is due to the fact that naked short sellers have decimated their
respective PPS to the ground, and investors who still support the companies and
those same short sellers are doing battle to preserve their respective positions
and that causes the volume to skyrocket. I can only wish for a thinly traded stock
and a fair PPS. Perhaps the definition of “thinly traded” comes from the lower
market capitalization of some of these companies?, Fair enough, but it is the
overriding attitude coming from within your own organization, that most of these
OTC and pink sheet companies are “piece of sh__t” stocks, or “garbage” stocks, and
that it’s even a waste of time to come to the aid of the ones that might have a
legitimate complaint.
Also ask yourselves, or rather some of your counsel’s how it is that huge issues
can be almost concluded within a relatively short time frame, Re: Enron, Arthur
Andersen, Tyco, Global Crossing, Martha Stewart, WorldCom, ad-infinitem, yet a small
and growing company, (PCBM) with a promising future for it’s employees and a very
large and diverse shareholder base, is held up, almost to the point of total
destruction, for 18 months, over a minor miscue in a PR?
Re:(SEC vs PCBM, et-al, # 8:02CV-822-T-17-EAJ)
The prevailing attitude that the OTC and pink sheets are the Wild West, or that
it is a neighborhood to be avoided. It is only that way because of the lack of
enforcement, or should I say selective enforcement, that has prevailed over the
years past. I would submit that both the SEC and all SRO’s are as much to blame
for the current environment, on the OTC, as those that would endeavor to circumvent
the system for their own gain.
Another area of absolute failure is the oversight of our so-called SRO’s
These agencies have more than adequate rules and provisions in place, that this
problem of naked short selling should never have grow to the proportions that it
has. But instead it has been the greed and corruption that has pushed those same
rules into the background, all in the favor of profits. I would expect that a
country as great as the United States would have learned long ago that leaving the
fox to guard the hen house, leaves no eggs for breakfast, nor chicken for supper.
These SRO’s are clearly incapable of regulating themselves, therefore I submit that
someone must step in and do it for them. Perhaps Mr. Eliot Spitzer?
The DTCC is one of the SRO’s that is clearly failing in it’s mandate to perform
it’s function and protection of the investing public, It’s duty to proper and
timely settlement of sales is a total sham! If the wider investing public really
knew how much of a complete failure this old boys club, of thievery, and self
interest really was, the entire system would collapse in a heartbeat as most would
withdraw what little investment dollars they had left in the system. Why does it
have to come to lawsuits (Re: Nutek vs The DTCC #CV-03-0321-JCM-RJJ, District of
Nevada), in order to get the message across that the system is in failure?
It has become apparent that our SRO’s have no intention of self-regulation, self-
policing, or protection of the very people that trust them to protect, monitor,
and regulate the flow of legally paid for securities. The list of the board of
directors, at the DTCC, reads like a who’s who of the same institutions that appear
almost daily in our papers as being under investigation for this fraud, or charged
with that improper action. Transparency at the DTCC is as clear as a brick wall.
What are they hiding? Their motto must be “for us, by us”.
Also I have a problem with what is commonly referred to as the blue sky agreement,
which basically states that any country wishing to participate in the trading of US
securities, must adhere to and observe all rules and regulations that are currently
on the books in the US, Am I mistaken? How about throwing a little weight around and
informing Canada and other countries that they are clearly allowing the abuse of the
privilege of trading in US securities, and that they may be cut off if they do not
enforce the rules. And yes, I am aware of the new union between the SEC and other
countries in an effort to streamline market enforcement. Re: the IOSCO Multilateral
Agreement on Enforcement Agreement (release # 2003-145). I fully support this new
initiative, and I hope you use it to it’s full potential.
Why does it that an agency such as yours, which was developed under the words “buy
the people, for the people”, have such a hard time understand that very same concept?
Why is it that your agency has such a hard time enforcing existing rules, with all
the people and money at your disposal, yet an Attorney General bowls strikes with
far less?
I would submit that it may be time for the SEC to become more proactive, as opposed
to reactive, in it’s handling of the securities markets, lest it find itself obsolete.
I would still like to commend you for taking the first steps in eradicating the
scourge we all now know as naked short selling, and for having the courage to
starting to standing up to the big money firms of wall street, that are surely by
now crying out for you not to implement these proposals. I fully support any effort
to stamp out corruption and fraud, especially, that which is clearly financial
terrorism, of almost epic proportions.
But I implore you to take it just one little step further and put some serious teeth
into your proposals, and close all escape routes and future inroads that the crooks
are surely exploring, even now. I further implore you to use some of those millions
of dollars that your budget was increased by, to become aggressively proactive, as
opposed to sluggishly reactive. Although some of the fraud and abuses you are
addressing may have taken years to accumulate and play out, it is quickly robbing
honest, hard working people, of their dreams and their futures.
Thank you for the opportunity to comment
Kevin Cundy